How Dollar Stores Are Staying Competitive In A Changing Retail Climate

It’s been good days for America’s dollar stores.

Despite the doom-and-gloom reports that retail is facing the end of days, the dollar store concept has been a smashing success. In fact, dollar stores seem to be successful doing the exact opposite of what other major American retailers are doing.

As malls continue to lose tenants and retail closures continue, the dollar store continues to see positive growth and upward trends of success:

Fueled by explosive growth, dollar retailers continue to open new stores

While planning for new stores, revamps and updates for older stores

Excels at finding ways to get deeper into the wallets of middle-income families

Building locations in rural areas, pushing into regions dominated by major retailers like Walmart

Tight control on finances and expenses allows rapid, extensive expansion

Further proof that dollar stores are doing well: investment growth.

At the same precise moment when major department store revenues are declining, Dollar General and Dollar Tree continue to see growth over five percent. They join the ranks of fast-fashion retailers H&M and Zara as some of the fastest-growing retail brands. Their stocks are both up substantially in the previous year -- Dollar General more than 20 percent and Dollar Tree north of 35 percent. By comparison, the S&P Retail Index has remained flat.

The growth of these stores began before this year. In 2016, the dollar store industry grew from $30.4 billion in sales to $45.3 billion -- earning a 50 percent growth rate heading into this year, according to research from Seeking Alpha.

The Billion Dollar $tore Origin Story

Believe it or not, the concept for dollar stores has been around for more than five decades. If you trace back the lineage of today’s preeminent forces in the dollar store verticals, you’ll discover founders who made bold choices, saw a market opportunity and invested personally in the earliest stages of their years. Each of the founders of the primary dollar store retailers that are thriving today held a faith in putting the customer first and providing value and low prices on goods.

Here are a few of the companies that were (and still are) part of the American dollar store vertical:

Family Dollar

Family Dollar got its start with a $6,000 investment by their founder, Leon Levine. With a penchant for menswear and shoes, he parlayed his personal touch on stores into a chain that became worth hundreds of millions of dollars.

He was initially inspired by watching New York-based Filene’s which filtered away sales merchandise to their basement. In November 1959, Leon’s first Family Dollar opened as a bargain-basement shop in Charlotte.

His first store quickly became four in the Charlotte area and Leon took pride in scouting for locations for future stores on his own. His initial stores were based in shopping centers and future locations he chose were picked by how much leaking oil he saw in the parking lot. Not coincidentally, one of Leon’s biggest sellers was motor oil.

He went through hundreds of names before settling on one that hit on his core customer -- “family’ and the ‘dollar’ signified the price point of his products. He emphasized value over cheapness.

Family Dollar’s core customer, the person the executives think is most likely to be walking through the door to buy stuff, is a woman in her mid-40s who makes less than $40,000 a year and is the head of household, meaning she has relatives or kids in the house, but no husband. Is that the type of person who’s most likely to be driving a car that’s leaking oil?

Leon was extremely deliberate about his store’s look and feel. He wanted customers to have a uniform experience no matter where they were. While stores were aimed to replace the local five-and-dime, small-town rural general stores of old, the expectation was customers could walk into any Family Dollar in the country and be able to quickly find what they needed while being met with genuine customer service.

Identity breeds familiarity. For a long period of Family Dollar’s existence, women’s wear would be located in the front of the store, just to the right of the front doors. Why? Because Leon knew that majority of customers turn to the right when walking into a store. And, the majority of Leon’s customers were women. When the stores were laid out consistently, it allowed managers and staff to focus on providing exceptional customer service.

Eventually, the stores were remodeled and redesigned in the 1990s. They stopped selling the motor oil and also items like cigarettes in favor of toys, games, and electronics.

Today, there are more than 8,000 stores from coast-to-coast. But the core philosophy has remained: the customer is always first.

“The customers are the boss, and you need to keep them happy,” Leon said.

Dollar General

What began as a single store in Springfield, Kentucky in 1955 has morphed into one of the largest small-box retailers in the nation. The origin of Dollar General remains very true to its name -- no item in the store cost more than one dollar. Founder Cal Turner built his eventual empire from retail competitors who would hold “dollar sales” in an attempt to move merchandise.

Cal believed that he could create a sustainable business on that model, and since, the store has ridden the fluctuating dollar, economic ups and downs, and consumer uncertainty. Early on in Dollar General’s days, Newton faced criticism for embracing his dollar store concept, but as a student of trade and commerce taught by his father during the Depression and World War II, he was able to evaluate and understand competition. His insights became a valuable asset to building the company into the powerful retail brand it is today.

Despite that, the Dollar General brand has remained entrenched in the idea that consumers should be provided with value and his brand was built on a foundation that prided itself on hard work and championed customer service. “Do what you love. Then you won't regret coming into work on Monday,” Newton was known to say.

Knowing the Customer

Ever before the Great Recession of 2008, the dollar store retailers have understood their core customer and the value they provide. They probably would’ve never imagined that the economic tumult that many Americans have experienced since 2008 would benefit their brands.

Now, more than ever, with the unknowns impacting major American retailers, dollar stores are seeing increased success fanned by the erosion of an entire class of Americans. Where middle-class Americans used to shop at malls, now they’re turning to discount retailers because they’re becoming conscious about spending in the face of stagnant wages and decreased job opportunities.

Malls that were once built at a rate of four times that of the population growth are now beginning to experience the effects of a widely-changing consumer demographic. The malls that are standing strong -- and there are plenty, are those catering to a flourishing and upper-income demographic. According to the research firm, IHL, “the majority of malls that were built in the last 30 years were in areas thought to be middle class.”

The Pew Center further illustrates the ever-increasing shift between upper and middle incomes:

Dollar General CEO Todd Vasos proclaimed that this shifting of the American Middle Class was creating new market opportunities for their brand.

“The middle-class continues to go away, unfortunately, to the lower end of the economic scale versus the higher end,” Vasos said at a September Goldman Sachs retail conference. “So as this economy continues to chug along and creates more of our core customer, I think there’s going to be more and more opportunities for us to get in and build more stores.”

Today, the fastest-growing retailers are those who are trying to reach this new consumer. Of the top ten retailers, Dollar General, Dollar Tree, 7-Eleven, and Aldi are in the top five.

Very much echoing the knowledge and sentiment of Family Dollar’s founder, Todd Vasos laid out the new core customer to investors. Who is it?

As stores continue to be built at a rapid pace even amidst a retail climate in flux, dollar retailers will continue to tap emerging technology to better understand how to reach their customers, engage them, and keep them coming back. In addition, there will also be technological advances that will continue to help these retailers in terms of staffing, keeping employees engaged, and helping products move along from distribution centers to stores.